Many Seattle tech workers are suddenly considering real estate investments, thanks to a new federal tax incentive. SmartCap Group says it’s ready with an opportunity for them. The Redmond, Wash. real estate firm just launched an Opportunity Zone Fund, a new investment vehicle created by the tax overhaul Republicans passed in 2017.
The new tax code designated economically distressed neighborhoods across the country as “Opportunity Zones,” where investors could set up funds to finance projects in the hopes of financially boosting areas in need. The hook? Investors who sell other assets and put the payouts into Opportunity Zone Funds can defer capital gains tax on those sales. If they hold the Opportunity Zone assets for long enough, they can avoid paying capital gains tax on the appreciated value altogether.
The SmartCap Opportunity Zone Fund’s first project will be a 12.5-acre industrial development north of Seattle in Arlington, Wash. The company is raising $10 to $10.5 million for the project, most of which has already been committed, according to Tim Shoultz, who is leading the fund with his partner Joe Ollis.
Both executives led teams at Microsoft before moving into real estate. They developed a network of tech workers who comprise almost all of the investors in the new Opportunity Zone fund. Shoultz estimates 98 percent of the investors come from tech and “are specifically looking to diversify within their portfolios outside of just stock.”
“Amazon and Microsoft are a great example, where we have investors who have significant net worth tied up into their stocks,” he added. Those investors “don’t really have the desire to sell those stocks and take the tax penalties or tax hits on that, so the Opportunity Zone Funds specifically allow investors to sell those assets and defer their tax.”
In addition to the Arlington development, SmartCap is eyeing a larger project in the South Seattle industrial area. Shoultz is keeping a lid on that development but said the fund would raise between $30 and $50 million to get it off the ground.
Opportunity Zone projects in rapidly changing areas like South Seattle have given some community leaders pause. Maiko Winkler-Chin, director of the Seattle Chinatown International District Preservation and Development Authority, told GeekWire, “it could be a total gentrification machine,” after she started hearing rumblings about the new program.
A report ranking Opportunity Zones based on their risk of gentrification showed that, among the areas likely to be the most lucrative for investors, the ones in West Coast tech hubs have the greatest risk of displacement. Downtown Seattle and the International District are among the Opportunity Zones with the highest risk of gentrification in the country, according to the research.
But the goal of the new program is to unlock frozen capital and direct it toward communities that have struggled economically. In the Pacific Northwest, there have been some early wins for advocates of Opportunity Zones, like the Obsidian Fund. Founded by technology investor Allen Alley, the fund supports solar energy projects in rural Oregon.
For better or worse, Opportunity Zone Funds are attracting serious cash from members of the tech industry who have capital locked up in stocks.
“We’ve had very significant interest, especially in the tech base, for this type of investment where they’re able to diversify out of their tech stocks and invest into something like commercial real estate that has a different life cycle and a different market cycle,” Shoultz said.